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PACE and the 2017 Tax Bill

December 21, 2017

A flurry of activity in the House and Senate to reconcile and pass a tax bill before the end of the year has raised concerns about how this bill, the Tax Cuts and Jobs Act, might impact homeowners' ability to afford energy efficiency and renewable energy home upgrades.

Here at Renew Financial, we’ve been paying close attention to the impact the tax bill might have on PACE financing, which empowers homeowners to create more comfortable, safer, and healthier homes.

Let’s take a look at some of the particular areas of interest:

State-and-local-tax (SALT) deduction: Does not impact PACE

Previously, homeowners who itemize deductions could deduct all of their state and local taxes (including property taxes) on their federal tax return. The new tax bill caps the deduction of state and local taxes at $10,000. This change will affect taxpayers in high-tax states and regions with high-priced homes, such as California and New York, but it has no direct impact on PACE.

As you know, PACE allows homeowners to borrow the entire amount of certain energy-efficient home improvements and then gradually repay them as a line item on their property tax bill. However, PACE payments have never been eligible for deduction as a property tax. The interest payments on a PACE assessment, however, may be eligible as a mortgage interest deduction. And that is affected by the new bill.

Mortgage Interest deduction: May affect PACE

Under current tax law, homeowners can deduct their interest payments on up to $1 million of mortgage debt. The new law lowers that cap to $750,000 and also eliminates the home equity interest deduction.

PACE financing, as a home improvement debt, is generally treated like a mortgage, so we expect that the new cap may impact some customers’ ability to deduct their PACE interest payments. However, the higher standard deduction in the new tax law means that it's likely that fewer people will itemize their deductions, including mortgage interest.

Eliminating tax deductibility of home equity loans and home equity lines of credit (HELOCs) does not directly impact PACE customers, but this change may be of interest to homeowners who are still considering how to finance their home improvement projects.

It's important to note that everyone’s tax situation is unique, and homeowners should talk to a tax professional to determine their actual impact.

The House bill had proposed eliminating the electric vehicle (EV) tax credit and scaling back renewable energy tax credits. Though the final version of the Tax Cuts and Jobs Act does not include any change to these programs, we’ve included a little refresher on both these tax credits.

The renewable energy tax credits, also known as investment tax credits (ITCs), apply to solar and wind power systems. Under current law, both homeowners and companies can claim a 30% tax credit on the cost of a solar energy system installed through 2019. Commercial and utility companies can also claim a 30% tax credit on wind turbines. All of these tax credits will be phased out over time.

Since the solar ITC was implemented in 2006, annual solar installation has grown over 1,600%, according to the Solar Energy Industries Foundation. The wind power industry has also surged. It now generates more energy than any other renewable source, the American Wind Energy Association states.

We will continue to monitor activity in Congress and legislation that could potentially affect PACE. And we’ll keep you updated, so that home improvement professionals can share accurate information with their customers, and homeowners can make informed decisions about their most important investment — their home.